Crowdfunding: let’s see what it is and what it is for, who can use or invest in it, what are the risks, and the best platforms!
In recent years you may have heard a lot about crowdfunding, but, perhaps, you do not know that there are different types and, probably, you do not know what are all the advantages and all the risks of this financing tool, both for investors and for those who want to launch a startup.
To know how crowdfunding can lead you straight to success, you need to know both perspectives thoroughly, analyzing this important resource from different points of view. First, however, reflect on another aspect: do you really know what crowdfunding means and exactly how it works? The next few lines will serve to dispel any possible doubts you may have in this regard.
What is crowdfunding
The term “crowdfunding” originated from the fusion of two words, namely “crowd” and “funding“.
Through this collective financing tool, an individual or a group of people has the opportunity to raise money for the realization of their business project. The distinctiveness of this tool lies in the fact that the projects that, generally, resort to this solution are very innovative or niche and, precisely because of this, would be unlikely to have access to more traditional forms of financing. Then there is another distinguishing feature of crowdfunding: this tool is based on receiving modest amounts of money from a group composed of many people (even small funders) and not, therefore, a large sum of money from a single party or a few parties.
At this point it is necessary to clarify another key distinction: do you know the difference between fundraising and crowdfunding? People often tend to get confused by overlapping these two concepts, but although they have commonalities, they do not identify the same thing.
Fundraising refers to the way in which sums of money can be raised for a purpose that, in most cases, is charitable.
The main difference between crowdfunding and fundraising, therefore, lies in the fact that the former is a tool used especially in the business sphere, while the latter generally concerns the nonprofit sector. There are, however, also further differences: while in crowdfunding those who invest receive, often, a reward, this is not the case in fundraising, where those who make their funds available do so, precisely, only for purely charitable purposes. That’s still not all: fundraising, unlike crowdfunding, tends to see the investor community involved for a longer period of time, leveraging, precisely because of its primary purpose, a more lasting interaction based on transparency and loyalty.
Now that you know more precisely what crowdfunding is and what its specific characteristics are, you need to take the next step and analyze, in more depth, the two sides of the same coin, namely, crowdfunding as a form of investment and crowdfunding as money collection (not to be confused, however, as we have just seen, with fundraising).
Form of investment
As already pointed out, a crowdfunding platform can be used by two people: those who promote a project that needs additional financial resources to be launched or carried forward, and those who want to invest their own savings on others’ business ideas.
In analyzing crowdfunding as a form of investment, it is necessary to emphasize that it is an increasingly popular “alternative” method to which several advantages are linked. It will be possible to explore the benefits more fully once the different forms of collective financing that exist today have been defined, but already now we can shed light on an aspect that is too often underestimated: investing in innovative startups or innovative SMEs, including through crowdfunding, allows access to certain tax benefits in Italy, such as the Irpef deduction.
Where there are advantages, however, there are often also risks: in this case, they are mainly due to the fact that crowdfunders often do so because the projects are particularly innovative or niche and, therefore, would be unlikely to have access to forms of debt capital or venture capital. This means that investing in these projects is riskier, even though it can be very profitable. After all, as economist John Maynard Keynes argued,
“Successful investing means anticipating the anticipations of others.”
To proceed to a full analysis of the risks, as with the benefits, it is necessary to know how many and what forms of crowdfunding exist nowadays. That time has not yet come.
We must, now, delve into the concept of crowdfunding as money collecting, that is, from the point of view of those who promote, through such a platform, a business project. This particular form of collective investment also lends itself to being used by those who do not have access to other forms of financing, but this, in addition to being a great advantage, also represents a disadvantage: being practically “within everyone’s reach,” in crowdfunding competition and rivalry are very high and, therefore, emerging in the magnum sea of business ideas that promise to revolutionize the world is not easy. This means that you have to be able to sell your idea very well, touching the right chords in terms of marketing.
The four types of crowdfunding
As preannounced, there are different types of crowdfunding. The most common classification, specifically, identifies 4 main forms of crowdfunding. They are:
- Donation crowdfunding;
- Equity crowdfunding;
- Lending crowdfunding;
- Reward crowdfunding.
Donation-based crowfunding refers to a form of crowdfunding in which those who fund the project do so without receiving anything in return. It is, therefore, a true donation, which does not include any form of reward for the person making it.
Equity-based crowdfunding consists of financing through which the funder acquires equity shares in the company in which it has invested, with the aim of obtaining a financial return linked to the investment made. Each funder, therefore, gets a percentage of shares proportional to the amount invested.
Another type of crowdfunding is Lending-based crowdfunding, which is based on the assumption that the money put in by the backers is paid back with interest. It is, therefore, a kind of lending of money between individuals, but this is done with the intermediation of a platform.
Last, but not least, is Reward-based crowdfunding: by adopting this solution each backer, in case the campaign reaches the predetermined goal, receives a non-monetary reward, which, in most cases, is the final project itself they funded or access to exclusive content.
Who can take advantage of it
The types of crowdfunding just mentioned, by their very characteristics, generally target different audiences.
Donation crowdfunding, for example, as you have probably already guessed, is the form of crowdfunding best suited to funding nonprofit and high-impact social projects.
You should know, however, that equity crowdfunding is only available to innovative startups and SMEs (according to the Italian government).
Lending crowdfunding is often used by SMEs that need financing to operate their businesses.
Finally, Reward crowdfunding specifically targets those working in the arts and culture: the final project, for example, may be a music album, a short film, or even a board game.
Crowdfunding: how it works
Reviewing the various types of crowdfunding, we have already described, in brief, what happens in each of them. In order for everything to be even clearer for you, however, it is necessary to delve further into how crowdfunding works.
A crowdfunding platform connects those who need to receive funding for their project and those individuals who are willing to finance projects of their interest, and makes possible and manages the negotiation between these two parties by providing both with the necessary guarantees.
Although it varies from type to type, the mechanism of operation of a crowdfunding can be summarized as follows: those who want to receive funding apply for their project to the platform, which, after an analysis of its characteristics and potential, decides whether or not to include it within its catalog. Once it is published, the funding campaign starts: if the goal is reached, the person who funded the project is paid (where this is provided for), otherwise he receives back the money he invested.
Launching a capital raising
Having described the general workings of crowdfunding, it is now time to analyze how you can launch a capital raise on such a platform effectively.
You will well understand that the choice of the specific platform on which to start one’s funding campaign is, in many cases, fundamental: there are several of them and each of them, as we will see in a moment, has its own peculiarities. Among the aspects to be considered, there is, of course, the technical support provided for the realization of the campaign, the limitations (some platforms prohibit certain forms of crowdfunding or particular types of projects) and the fixed or additional costs provided for its realization (such as, for example, those related to the release of donor contacts).
Equally important, in order to launch a successful capital raise, is to maintain a transparent attitude toward possible investors: this requires clearly stating the purpose of the initiative being promoted, telling the story behind the project, and detailing one’s fundraising activities, updating backers on the amount raised, the number of donors, and their identity (when possible).
As already pointed out, the competition on crowdfunding platforms is very high and, therefore, you also need to provide a communication and marketing campaign to support your initiative. Remember to focus on videos, because even and especially in this case they prove to be a high-performing resource.
Investing in a startup
You need to know that investing in a startup through crowdfunding is quite simple: all you need to do is register on the platform, follow the instructions on it and, once you have identified the project you want to focus on and, of course, after carefully reading the terms and conditions provided, proceed with the financing. Reading the rules provided by the platform is an essential step especially in the case of Lending crowdfunding because, before proceeding with the financing, it is absolutely necessary to know the return offered by those promoting the project, the duration of the loan and what the credit risk is.
There is another aspect to consider: for those who invest, crowdfunding platforms almost never have fixed costs associated with membership or individual funding.
The best platforms
We have pointed this out repeatedly: there are now so many crowdfunding platforms, and finding the one that best suits your specific needs may not be easy. Below are some of the best crowdfunding platforms currently on the web:
Crowdfundme is a popular Italian crowdfunding platform, as well as Italy’s first listed equity crowdfunding platform. Crowdfundme draws up an ad hoc business plan and submits the projects it receives to a number of potential investors. If approved, the projects are published and made available to prospective investors for a duration of 60 days.
Mamacrowd, the leading equity crowdfunding platform in Italy, subjects the projects it receives (a questionnaire must be filled out to apply, and to activate a campaign you must be registered with the Business Registry) to careful evaluation, and this is an important reassurance for those considering investing through this portal.
Another well-known Italian equity crowdfunding platform is Opstart, which, in 2020, ranked first among Italian crowdfunding portals in terms of capital raised.
200crowd, an Italian equity crowdfunding platform with more than 20 million euros in capital raised and more than 20 thousand potential investors, stands out in one aspect in particular: it requires a minimum investment of 500 euros for each campaign.
Innovative startups and SMEs are WeAreStarting‘s target audience. On this Italian equity crowdfunding platform, the average investment per individual project is about 4 thousand euros.
You have probably already heard of Kickstarter, since it is one of the most popular crowdfunding platforms (in this specific case Reward crowdfunding, based on different levels of rewards) in the world. Launched in 2009, it has raised over $6 billion in investments. Most of the projects funded on Kickstarter belong to the fields of art, food or music.
Indiegogo is also an extremely popular international crowdfunding platform. It offers the possibility of activating Reward crowdfunding and Donation crowdfunding campaigns and allows you to choose between fixed or flexible funding goals. Design and technology are the most popular sectors on Indiegogo.
Pay attention because now it’s back to Italy: Recrowd, in fact, is an Italian Lending crowdfunding platform that has raised over 18 million euros in capital over the course of its history.
Eppela, a Reward and Donation crowdfunding platform with over 30 million euros of capital invested in it, is also Italian. On this portal anyone can promote a project for free, also with the help of an advisor and a kit provided by the platform itself.
What to pay attention to
Our analysis of crowdfunding can only end with a reflection on its limitations and risks for investors and those seeking funding.
In particular, for those who decide to invest their savings in a project promoted on a crowdfunding platform, the risks are mainly related to the fact that practically anyone can apply for funding on these portals and, therefore, the chances of a project actually reaching its hoped-for goals are reduced. Obviously, the risks increase in the case of equity crowdfunding, since the backer acquires equity shares in the company he or she has invested in.
Even for those who promote their projects through crowdfunding, the costs represent the most delicate aspect to pay attention to: you must remember, in fact, that in the case of a crowdfunding campaign, the capital raised does not coincide with the capital actually available, since from that figure you have to deduct the amount to be allocated to the platform on which the collective funding took place. Also consider this aspect if you are considering seeking funding for your project through crowdfunding, and remember that in order for your project to gain the right visibility among many, you will also be required to make a significant investment in marketing and communication.
Specifically, the cost items for starting an equity crowdfunding campaign can be many. It is certainly not possible to indicate an equivalent figure for all campaigns, but some common cost items from an analysis conducted by Crowd Advisor can be indicated.
|PLATFORM FEES||average 6% of the entire capital raised|
|DRAFTING FINANCIAL DOCUMENTATION||between €1,000.00 and €5,000.00|
|LEGAL AND CORPORATE COMPLIANCE||between €1,000.00 and €5,000.00|
|VIDEO PRESENTATION||between €1,000.00 and €3,000.00|
|STORYTELLING||less than €1,000.00|
|COMMUNICATION PLAN||budget of € 1,000.00 to € 3,000.00|
Pay attention to the so-called “ancillary costs“; in fact, within the costs for the creation of financial, legal and corporate documentation could also include charges related to appraisals, patents, executive summaries, acknowledgements and any previous evaluations coming from due diligence; costs for multimedia communication could also include charges for the creation of a possible landing page or for the preparation of an email newsletter; finally, it is essential to be transparent in the preparation of all documentation and, in this sense, it is necessary to shed light on the strengths, weaknesses, opportunities and threats of the project.
Download the full list of crowdfunding platforms in Italy
As with incubators and accelerators, to help you identify the platform best suited to your needs, we have developed a list of all the Italian platforms.
As you will see, the list is divided by name, type, email and website to allow you to get an overview of the Italian ecosystem.
If we have missed anything, please let us know so that we can keep the list up to date.
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